What is a p/e ratio?


The price-to-earnings ratio (P/E ratio) is the ratio that is used for valuing a company. It tries to show its current share price relative to its per-share earnings (EPS). The P/E ratio is also known as the price multiple or the earnings multiple.


P/E ratios are used by investors and traders in the analysis phase. It is used to determine the relative value of a company's shares in an head-to-head comparison. It can also be used for benchmarking (to compare a company against its own historical record) or to compare aggregate markets against one another or over a certain perior of time. To calculate the P/E value, you should just divide the current stock price by the earnings per share (EPS).

EPS can be shown two ways. The first is a metric listed in the fundamentals section of most finance sites (like yahoo finance) with the notation "P/E (TTM)", where “TTM” stands for “trailing 12 months". This number shows the company's performance over the last 12 months. The second type of EPS is called either "estimated price to earnings" or "forward P/E". It can be found in the company's earnings release, and is just their best guess at the future earnings of theirs. While trailing P/E is far more objective, forward P/E should be taken into consideration (maybe even more) when investing. 

The P/E ratio helps investors try to determine (to the best of their abilities) the market value of a stock as compared to the company's earnings. To sum it all up, the P/E ratio shows what the market is willing to pay today for a stock based on its past (trailing P/E) or future (forward P/E) earnings. A high P/E could mean that a stock's price is relatively high when compared to earnings, making it possibly overvalued. On the other hand, a low P/E might be an indicator of the current stock price being low relative to earnings.



Hope this will help you with your future trading!